The Commoditization of Recordkeepers: What Is It and Why Does It Matter to You?

You see it happening all around you – small, boutique stores are closing and being replaced by the big box behemoths. With the big box takeover comes some noticeable advantages – lower prices, more choices, and on-demand goods and services, but there are also distinct drawbacks such as less competition and commoditization. Consolidation leads to commoditization. Commoditization is the lack of meaningful differences in goods or services, which leads to the goods and services being sold on price alone with little to no consideration given to quality. And this trend is not only rampant in the consumer goods sector, but it is also having a significant impact in the 401(k) recordkeeping and administration world. There are continually less and less options to choose from with service models that are starting to look more and more alike. The more “boutique” style, purely recordkeeping and administration firms are gone giving way to one-stop-shop firms; where recordkeeping and administration makes up a very small portion of their business model and the services offered range from investment management to insurance to individual investor services to payroll processing.

So Many Departments, So Little CommunicationHas this ever happened to you? You enter a retailer looking for a specific item, after a few minutes of scouring the shelves you are unsuccessful, so you find an associate.

You: “Where can I find such and such item?”

Associate: (pointing in the opposite direction of where you looked) “It is way over there at the other end of the store on aisle 128.”

You turn to look for said aisle and the associate magically disappears. While mildly frustrating in a department store, the problem of “not-in-my-department” can become a major issue when dealing with your plan provider. When our plan sponsors are forced to call their 401(k) provider, they often tell us that different questions must be outsourced to different departments such as testing, administration, or participant services; rarely, if ever, can one person answer their question. If you have ever played the game “Telephone” you know that repeating a statement over and over again to different people often leads to dilution or confusion of the original statement. Funny when playing the game, frustrating when trying to get important questions about your plan answered.

Lack of In-Depth Knowledge“Jack of all trades, master of none” comes to mind when assessing the roles of relationship managers in the one-stop-shop provider model. It’s easy to understand how this can happen; an individual can only be responsible for knowing so much about any one subject and even less about multiple subjects. Case in point, I recently had a back and forth exchange with a relationship manager about vesting. While vesting is not the most complex issue facing plan sponsors, if not administered correctly, it can become a nightmare. This particular issue concerned the actual versus equivalency method and how hours are counted under each. My plan sponsor indicated during the conversion process that she had uploaded hours for vesting using the actual method, when her plan document indicated that the equivalency method should be used. The plan provider confirmed that the method was not correct. It was not until my team stepped in and reviewed the vesting that we found the error and then took the appropriate steps to make the necessary corrections. Fortunately, the error was caught early enough in the process that the issue did not snowball out of control.

The “Alexa” of AdvisorsWith fewer and fewer provider options to choose from and more and more services being offered by each, how is a plan sponsor to make sense of it all? Our solution? We aim to be the at-home-assistant to our plan sponsors.

Grinkmeyer Leonard Financial: “Your plan uses the equivalency method for calculating vesting which means your participant is credited for 190 hours worked for every month they work at least 1 hour in that month.”

Plan sponsor: “Grinkmeyer Leonard Financial, how do I help get my participants ready to retire?” Grinkmeyer Leonard Financial: “Let us to hold one-on-one meetings with your participants where we can educate them on a variety of financial matters.”

We serve as the single point of contact for our plan sponsors; helping them navigate the relationship with their providers and manage their plan efficiently and compliantly. By bringing the focus back to our individual plan sponsor’s needs and concerns, we are bringing back the customized, personalized boutique-style approach to relationship management; where you are not helplessly bring passed from one person to another or pointed from one department to the next.

If you would like to learn more about how Grinkmeyer Leonard Financial can help you make a decision when it comes to analyzing your options between different 401(k) providers, please email jamie@grinkmeyerleonard.com or call 205-970-9088.

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When it comes to their retirement accounts, many investors often fail to think about required minimum distributions (RMDs). An RMD is the minimum amount that participants in qualified plans—like 401(k)s and 403(b)s—must withdraw from their accounts annually once they reach age 70½. Failing to take an RMD can lead to unnecessary tax burdens and other financial issues, so it’s important to understand the rules—and the common errors people make.

Common error:I took an RMD from my 401(k). This will satisfy both the RMD for that account and the one I have to take for my IRA—or any other account for that matter.

What the rules say: RMDs can be aggregated for certain accounts. For instance, if you have multiple traditional IRAs, you can take an RMD from one account that equals the total amount of RMDs you would have to take from all accounts. So, if you have two traditional IRAs and each has an RMD of $1,000, you can withdraw $2,000 from one account to satisfy both RMDs. RMDs for SEP- and SIMPLE IRAs can be aggregated with traditional IRAs as well.

This same RMD aggregation rule can be applied to multiple 403(b) plans, too. You cannot, however, take an RMD from a 403(b) plan to satisfy an RMD from an IRA. And when it comes to 401(k)s and other non-IRA accounts, such as profit-sharing plans, you must take a separate RMD from each plan.

Common error:I just retired and have a substantial RMD due from my 401(k) plan and a small RMD due from my traditional IRA. I can just roll the 401(k) into the IRA and take the smaller RMD.

What the rules say: Although you can roll your 401(k) into a traditional IRA, the RMD amount is not eligible for rollover. If, for some reason, the financial institution makes a mistake and allows the RMD to be rolled with the other eligible assets, the RMD for the 401(k) will still be due, as will the RMD for the traditional IRA. The IRS does not give specific guidance on this, but some experts advise that, in order to truly satisfy the RMD from the 401(k) plan, the RMD amount must be put back into the 401(k) plan and then withdrawn.

Common error:I have a Roth 401(k) or 403(b), and just like my Roth IRA, I don’t need to take RMDs.

What the rules say: One of the more puzzling rules regarding RMDs is the fact that Roth 401(k) and Roth 403(b) plans both have RMDs. This is after-tax money, so the RMD does not increase your tax burden like a distribution from a traditional IRA would, but it can be a nuisance because, if you miss taking it, you will incur a 50% penalty. It may be smart to roll over these designated Roth accounts into a Roth IRA prior to the date you must start taking RMDs. Be aware, however, that if an RMD is due, that portion of the account balance is ineligible for rollover.

Common error:As long as I am still working, I can delay RMDs from my 401(k) or 403(b) past age 70½; I don’t have to start taking them until the year I in which I retire.

What the rules say: It is true that participants in 401(k) or 403(b) plans who are still working after age 70½ may delay their RMDs from those accounts until the year in which they retire. There is, however, one caveat: If you own 5% or more of the company by which you are employed, you lose the ability to delay RMDs. Even though you might still be working after age 70½, the IRS requires you to start taking RMDs by age 70½.

Please note: The exception for delaying RMDs only applies to qualified plans. Participants who also have traditional, SEP-, or SIMPLE IRAs are always required to start taking RMDs from those accounts by age 70½.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax preparer, professional tax advisor, or a lawyer.

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On October 19, 2017, the Internal Revenue Service released Notice 2017-64, announcing cost-of-living adjustments (COLAs) that affect contribution limits for retirement plans in 2018. The list below, although not exhaustive, highlights key changes that retirement plan sponsors should be aware of, as well as some limitations that remain unchanged from 2017:

The elective deferral limit is increasing from $18,000 to $18,500.

The aggregate contribution limit for defined contribution plans is increasing from $54,000 to $55,000.

The annual compensation limit used to calculate contributions is increasing from $270,000 to $275,000.

The limitation on the annual benefit under a defined benefit plan is increasing from $215,000 to $220,000.

The dollar limit used in the definition of “key employee” in a top-heavy retirement plan remains unchanged at $175,000.

The dollar limit used in the definition of “highly compensated employee” remains unchanged at $120,000.

The catch-up contribution limit for employees age 50 or older remains unchanged at $6,000.

The table below displays the 2017 and 2018 limits for a host of tax breaks:

401(k) Plan Limits for Plan Year

2018 Limit

2017 Limit

401(k) Elective Deferral Limit1

$18,500

$18,000

Catch-Up Contribution2

$6,000

$6,000

Defined Contribution Dollar Limit

$55,000

$54,000

Compensation Limit3

$275,000

$270,000

Highly Compensated Employee Income Limit

$120,000

$120,000

Key Employee Officer Limit

$175,000

$175,000

Non-401(k) Limits

403(b) Elective Deferral Limit1

$18,500

$18,000

Defined Benefit Dollar Limit

$220,000

$215,000

457 Employee Deferral Limit

$18,500

$18,000

SEP and SIMPLE IRA Limits

2018 Limit

2017 Limit

SEP Minimum Compensation

$600

$600

SEP Maximum Compensation

$275,000

$270,000

SIMPLE Contribution Limit

$12,500

$12,500

SIMPLE Catch-Up Contribution2

$3,000

$3,000

IRA and Roth Limits

IRA and Roth Contribution Limit

$5,500

$5,500

Catch-Up Contribution2

$1,000

$1,000

1Employee deferrals to all 401(k) and 403(b) plans must be aggregated for purposes of this limit.2Contributors must be age 50 or older during the calendar year.3All compensation from a single employer (including all members of a controlled group) must be aggregated for purposes of this limit.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax preparer, professional tax advisor, and/or a lawyer.

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If I offered to give you $15 back if you gave me $10, would you do it? Of course, you would! That is pretty much the way a 401(k) company match works. If your company offers a matching contribution as part of its 401(k) and a participant contributes to that plan, then the company is giving that employee additional money just for participating. This makes a company match one of the most powerful tools in a participant’s retirement arsenal – if it is used correctly. Here are some ways that a company match can be so powerful.

Give Your Participants a RaiseThe general rule of thumb for retirement savings is that on average an individual should save between 10% – 15%. That number can seem daunting to most people. However, add in a company match and that number becomes much more attainable. For instance, if the company match is 50% of the first 6% deferred, then a participant who contributes the full 6% is getting 3% from the company and is now at 9% – much closer to the 10% goal. Also keep in mind that the participant got to that 9% number with only 6% of their own money being contributed. That’s pretty powerful stuff!

Match WiselyHow the company chooses to design the match can have significant impacts on participant behavior. If the company front-loads a match, such as offering a 100% match on the first 3% deferred, it may be inadvertently dissuading participants from contributing more than 3% of their own money. Also, if too little match is offered, then the company may miss out on the incentive feature that a match can offer. Therefore, it is important to assess how much money your company can afford to allot to match money and then design your match to encourage your participants to defer as much as possible into the plan.

Give the Plan Some ReliefIf your company is already offering a match and plans to continue doing so in the future and/or if the plan regularly fails annual compliance testing, then you may want to consider a Safe Harbor Match plan design. A traditional Safe Harbor Match is as follows: 100% of the first 3% deferred and 50% of the next 2% deferred. Therefore, if a participant contributes 5% of their own money, the company would match 4%. The other caveat with a Safe Harbor Match is that the money that the company contributes to the Safe Harbor Match is immediately 100% vested, which means it is the participants to take if she ever leaves the company. What makes a Safe Harbor Match so powerful is that by offering it, the plan is deemed to pass annual compliance testing, which means no more refunds to highly compensated employees if the plan would have otherwise failed testing. It also is an amazing benefit to your participants since a 5% deferral plus a 4% match gets them pretty close to that 10% goal.

A company match is a tremendous incentive that can help your employees meet their retirement goals. If you would like an analysis of your company’s current match structure or if you would like to discuss implementing a company match, please give me a call at 205-970-9088 or email me at jamie@grinkmeyerleonard.com.

Recordkeeping for an employer-sponsored qualified retirement plan is pretty much just as it sounds; an outside provider is hired to literally keep a record of participant accounts. This includes everything from accounting for how much money each participant has in her account, to the number of investment shares held, to the source of money deposited. On the surface, recordkeepers seem fairly similar, but get into the fine print and there are significant differences in contracts and services offered. Here is a list of some of those differences I have seen in my history of working with various recordkeepers.

Termination Clauses – When things are good, they’re good, but should your company need to terminate your relationship with your recordkeeper, there is a good chance that some fee will apply to end the relationship. Fees may vary. Also, recordkeepers have different arrangements when it comes to the services they will complete once they have been handed their pink slip. I recently came across a situation where the recordkeeper refused to complete the annual testing or Form 5500 if the plan transferred assets prior to the calendar year end.

Available Investments – The universe of investment options is slowly but surely become more available thanks in part to the Department of Labor’s Fiduciary Rule, but there remains some noteworthy discrepancies in the accessibility of investments across various recordkeepers. In some cases, recordkeepers offer sub-advised or sub-managed investments which includes the investment arm of the recordkeeper offering additional oversight on traditional investments, usually for an additional fee. There are also differences in the share classes offered. Share class matters because it often dictates the overall cost of investing in an investment option along with the amount that various parties, such as the financial adviser and recordkeeper, receive in compensation from the investment. (See my blog Share Class Warfare for additional information).

Third-Party Administration Services – Often recordkeepers will also offer third-party administration (TPA) services in what the industry calls a “bundled” service arrangement. In many cases, this arrangement makes sense because much of the data that a recordkeeper collects is also used by a TPA and therefore, having them work together is a win-win for the client and the provider. However, TPA services are another area with vastly different capabilities, costs, and proficiencies. Before you enter into a bundled agreement it is important to assess what the compliance and administrative needs of your plan are and whether or not the bundled TPA can meet those needs.

Although all recordkeepers may seem the same on the surface, there are several differences that can be found in the details and operation. If you would like assistance reviewing your recordkeeping arrangement, please contact me at 205-970-9088 or email jamie@grinkmeyerleonard.com.

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Often when we are engrossed in the day-to-day operation of 401(k) plan management, we can overlook the reason why we are all doing this – for the benefit of our people. We also focus on the here and now; making sure that employee deferrals are contributed on time, that investments are top notch, and that participants are retirement ready. The one item that often get overlooked is what will happen when your hard-working people pass way. The simplest way to answer that question is to make certain all of your participants have an accurate beneficiary form on file with you, the plan sponsor, and if possible, the plan’s recordkeeper. Here are 5 items that can help you and your participants get back on track with their beneficiary forms.

1. Don’t leave a beneficiary form blank, and don’t name your estate as beneficiary.
Failing to name an individual, or individuals, as your beneficiary could deprive your heirs or loved ones of inheriting your retirement assets. Another downside of not naming a beneficiary – your retirement assets would need to go through the lengthy probate process and could be subject to creditors.

2. Make a beneficiary designation for each retirement account that you own.
People often make the mistake of assuming that the beneficiary they name on one account will dictate who the beneficiary is on their other retirement accounts, but that is not the case. You need to have a valid beneficiary on file for each account.

3. Remember that beneficiary designations take precedence over wills.
Retirement assets are distributed according to the named beneficiary, regardless of any other agreements, such as wills.

4. Keep your beneficiary designations current.
Many people fail to update their beneficiary designations after major life events, such as a marriage, divorce, or new addition to the family.

5. Consider consulting a professional.
You may wish to seek the guidance of an experienced attorney, CPA, or financial advisor to help you make the best choices for you and your heirs.

Don’t let your hard work or that of your participants go to waste by having their retirement account balances go to the wrong person or worse, the state. If you need assistance with making sure that your beneficiary forms are on file and in good order, please give me a call at 205-970-9088 or email me at jamie@grinkmeyerleonard.com.

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As I mentioned in last week’s blog, running a 401(k) plan is a lot of work that is marked by several complex tasks and timelines. Therefore, this week I thought it would be helpful to highlight some of best practices for 401(k) plan management.

If you have any questions about how to implement these practices in your business, please give me a call at 205-970-9088 or email me at jamie@grinkmeyerleonard.com.

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Hours of work goes into managing and administering your company’s 401(k) and at times it may seem like a mountain of work for a molehill of appreciation. However, as someone who spends every day working on 401(k) plans, I am here to tell you that they matter – a lot! They matter to your company, your people, and you.

1.The 401(k) plan offers your employees a powerful savings vehicle
The 401(k) has many qualities that make it an attractive option for savers. High deduction limits (in 2017 employees under the age of 50 can contribute $18,000, those over 50 may contribute an additional $6,000) allow employees to save a significant amount into their 401(k) through simple payroll deductions; Roth options allow employees the ability to choose whether to be taxed now or taxed later; and features like automatic enrollment and automatic deferral increase allow employees to begin and increase their deferral amounts without proactive action.

2. 401(k)s can be a more financially prudent choice than a traditional investment account
Despite the confusion surrounding 401(k) fees, there are times when a 401(k) can be a better financial choice than an Individual Retirement Account. Due to the size of 401(k) plans, they may have access to shares of investments that may not be available to individual investors. This can lead to lower investment expenses. Additionally, 401(k) plans may offer access to a financial adviser who can provide financial education to you and your employees for no additional cost.

3. 401(k)s can lead to happier, more loyal employees
In the 2017 Workplace Benefits Report published by Bank of America, they found that 31% of employees selected a 401(k) plan as their top employment benefit, second only to health benefits. This same survey found that employee’s number one financial goal was saving for retirement. Furthermore, a study conducted by Lockton Retirement Services and detailed in the report “Finding the Links Between Retirement, Stress, and Health” found that 52% of respondents reported that having a retirement savings plan helps ease financial concerns “a great deal” and an additional 43% said it helps “a little.” Additionally, those employees with access to a retirement plan in which the employer contributed to the plan reported higher levels of job satisfaction and lower incidents of physical ailments. Therefore, if your company offers a 401(k) plan that can help employees save for retirement and reduce stress, it seems highly likely that those same employees will be happier and more loyal to your company.

Your employees look to your company to help them to save for retirement. If you do not think that your current plan is achieving that goal, please call me at 205-970-9088 or email me at jamie@grinkmeyerleonard.com and I will get to work for you today on developing a plan that works for your company and its employees.

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For retirement plans that are eyeing a year-end conversion or any transition in the near future, here are four tips to help make the conversion process go as smoothly as possible.

1. Make Sure Everyone is on Board

In my experience, many times the person that has the final say in deciding whether to hire or fire a service provider is not usually the same person in the company that works directly with the provider. Therefore, before making the decision to pull the plug on a provider you need to ensure that all members of your team are on board. Ask your team questions like, “What does ABC provider do that makes your life easier?” or “What is something that you wish ABC provider did better?” Once the decision has been made to make a change, make certain everyone is involved from day one.

2. Ask for Specifics

We all know that often times what we are sold and what we get don’t exactly match up. For this reason, it is important to ask your sales representative to give you specifics on what your plan conversion will look like and better yet, ask them to involve your service representative from the very beginning of the process. Get the details on payroll upload file feeds, distribution processing and timing, blackout periods, and service standards.

3. Tie Up the Loose Ends at Your Current Provider

The old saying “garbage in, garbage out” applies here. More than likely, you chose to convert your plan to a new provider because something at the old provider was broken; so, don’t bring that broken process or bad data to your new provider. Items that can be an issue in a conversion are outstanding loans, participant vesting information, automatic enrollment start dates, and more.

4. Control the Message to Your Participants

You may be excited to get a fresh start at a new provider, but keep in mind that change is hard, especially on your participants. They will have to learn a website and memorize a new call center number and they probably had absolutely no say in whether or not to make the change. The blackout period can also cause uneasiness among participants since there will be a time that they will not be able to access or even see their account balances. Therefore, make sure to get ahead of any unrest by controlling the messages they receive from you and the new provider.

There is so much that goes in to a successful plan conversion. If you would like to discuss these tips and many more, please contact me at jamie@grinkmeyerleonard.com or 205-970-9088.

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How many of you would hire a full-time employee and expect them to come to work once a year or maybe never again? I am sure that number is a big fat ZERO. However, many retirement plans hire a broker or financial adviser that does a lot of work initially and then only shows up once a year, if that – all while compensating that adviser like you would a full-time employee. While I am not advocating that your adviser should be in your office every month, she should be adding value to you, your plan, and your participants throughout the year.

One of the most important ways an adviser can contribute throughout the year is to offer education to your participants. Our team offers semi-annual education to the plans we work with along with on demand access to adviser advice when a participant has a question. It is all too common for advisers to skip this step because it can be a time and revenue drain, but it is far too important to the success of your participants’ retirement futures to neglect it. A full-time adviser will recognize this and offer solutions on to help educate your participants.

Your adviser should also be a thought leader who brings new ideas and solutions to the plan without being prompted. I recently drafted a letter for all of our plan sponsors to use to remain in contact with terminated participants. I did this because of the focus on terminated participant communication and orphaned account balances from the Employee Benefit Security Administration. There is always something new in the world of qualified plan management and your full-time adviser should be aware of how changes impact your plan.

Finally, your adviser should be able to identify trends, successes, and needs for your plan. This can be anything from overall plan cost to asset allocation. We keep track of asset growth, participation numbers, deferral percentages, and total plan cost as a way to analyze our impact on the plan over time. Trends can be important indicators of plan health and a full-time adviser should be able recognize them and their affect on your plan.

Chances are you are paying your adviser like a full-time employee and you should be getting the same value out of her that you would expect out of your top team members. If you would like to review your plan, please email me at jamie@grinkmeyerleonard.com or call me at 205-970-9088.

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DISCLOSURE

Trent Grinkmeyer, Valerie Leonard, and Jamie Kertis are Registered Representatives and Investment Adviser Representatives with/and offer securities and advisory services through Commonwealth Financial Network, Member FINRA (www.finra.org) / SIPC (www.sipc.org), a Registered Investment Adviser. Fixed insurance products and services offered through Grinkmeyer Leonard Financial or CES Insurance Agency. This communication is not intended to replace the advice of a qualified tax advisor or attorney.This communication is strictly intended for individuals residing in the following states: AL,CO,FL,GA,KY,LA,MD,MS,OK,PA,SC,TN,TX. No offers may be made or accepted from any resident outside of these states due to various state regulations & registration requirements regarding investment products & services. Please review our terms of use here: www.commonwealth.com/termsofuse.html